A few days ago, on my weekly radio show on All India Radio, there was a call-in question from a listener who had a hard, almost unsolvable problem. This person was invested in a number of equity funds. Back in April, when the equity markets had crashed in the first response to Covid, he had quit the game and redeemed most of his investments. At that point, he had panicked and come to believe that there would be a large further decline and that the safest thing to do would be to wait it out and invest at some point later. What happened was the opposite. Equity values and most mutual fund NAVs are almost back to where they had started off in late February.
However, my friend is still in the same state. Unable to overcome his apprehensions, he has hesitated and is still sitting on his money. Now, he has had the worst of both sides. He was invested when the markets fell, and was not invested when it rose. The losses he made in February and March are now permanent.
This saver's dilemma really came home to me because I had to respond to him in a public conversation on live radio. However, this is not an uncommon story, either now or in earlier declines of the markets. The urge to time the markets appears to be deeply ingrained in so many investors. It's a very tempting idea, an extremely easy way to enhance your returns or at least, to save them from wasting away. The markets are falling and you think what a waste, let me sell and I'll buy back when they start rising again.
In a way you can't really blame people. The idea that investing is all about 'Buy low, sell high', is practically the first thing that savers learn. In fact, here's an old Wall Street joke that would have been a cliche if it wasn't so true. A beginner asks an old-timer, "How do you make money in the market." The wise man answers, "Nothing could be simpler: buy low, sell high." The beginner asks, "How can I learn to do that?" Comes the response, "Ahhhh...that takes a lifetime." Unfortunately, the most common effect of this idea is that buying low and selling high is to sell whenever stocks drop and vice versa.
However, in reality, it's not about timing but about the general direction of investments, and the quality and suitability of the choices that you have made. At its heart, equity investing is a general bet on the direction and growth of the economy. If you think that hiccups aside, people's prosperity will mostly grow, and businesses will make more money then the problem becomes much simpler - that of investing in those businesses that will do better than others. And if you have chosen to invest through mutual funds then it becomes simpler still, of course, with help from Value Research Online!
Trying to predict tomorrow's news is not part of this process in any way. In fact, over the last few months, there is another drama that is playing out and that is in gold. Over a long period of time, gold has iffy returns. This is not surprising because, not to put too fine a point on it, gold is useless. Even though we call it a commodity, it has nothing in common with useful stuff like wheat or copper or oil. Since the virus crisis began, there has been a boom in gold prices, though of course, it may have ended by the time you read this. Although wise people are muttering phrases like 'safe haven' or 'inflationary expectations', the fact remains that this is just a self-reinforcing trend that has started and will subside. If you are investing for your future, there's as little sense in buying gold as there is in my phone friend's selling off his equity funds.